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Bankruptcy and credit scores

Lots of Maryland residents struggle with debt. While many realize that bankruptcy is an option, some are reluctant to pursue this for fear that it will cause further damage to their credit scores.

While Chapter 7 bankruptcies can stay on a credit report for up to 10 years, Chapter 13 bankruptcies may appear on a credit report for as little as seven years. However, businesses and individuals who review credit reports are often more concerned about recent credit history than old information. If a person has established a strong credit history since the bankruptcy, someone reviewing their credit report may give much greater weight to recent positive entries.

In addition, many creditors, landlords and employers don't review entire credit reports; they only review credit scores. A credit score is a three-digit number derived using an algorithm that takes into consideration all of the information on a person's credit report. After a bankruptcy discharge, this number may actually increase as the applicants will usually have little or no debt that is being reported.

Credit scores also usually take into consideration more recent information. While a new bankruptcy may indeed damage a credit score initially, over time, it's effect will be reduced. This is particularly true if the bankruptcy filer obtains new credit and uses it responsibly.

A debtor considering bankruptcy may benefit from speaking with an experienced attorney. Legal counsel could review the client's case and make recommendations regarding a choice of Chapter 7 bankruptcy, which involves the liquidation of a debtor's assets, or Chapter 13, which is a three- or five-year repayment plan that allows a debtor to hang onto valuable assets such as a home or car.

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